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COUNTRY REPORT

Turkey

October 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2001-02OVERVIEWDespite divisions in the ruling coalition, the government of Bulent Ecevitshould hold together in 2001-02. However, a crisis cannot be ruled outcompletely because of the inherent instability of the political system and theunresolved differences in the government coalition. Its survival will dependto a large extent on progress with the IMF-backed three-year stabilisationprogramme launched at the beginning of 2000. Tighter fiscal policy and thenew crawling-peg exchange-rate regime will continue to reduce inflation,but it will be above the government’s year-end targets. Nevertheless, theauthorities should keep policy sufficiently on track to maintain IMF support.Real GDP growth will slow in 2001-02, but fixed investment growth shouldremain strong, helping to achieve annual average GDP growth of just under5%. The budget deficit will decline sharply in 2001-02 as a result of the steepfall in interest rates in 2000 and the government’s continued commitmentto tight fiscal policy. The current-account imbalance will ease slightly butwill remain large at about 4.5% of GDP.

Key changes from last monthPolitical outlook• The confrontation between the government and the president over the

cabinet’s use of decree laws has increased political uncertainty and slowedthe government’s economic reform programme. Nevertheless, the EIUdoes not think the issue poses a threat to the survival of the governmentcoalition led by prime minister Bulent Ecevit.

Economic policy outlook• We expect the government to introduce more effective measures to curb

domestic demand growth than those announced so far, but they will notstart to have an impact until 2001.

Economic forecast• The few measures introduced by the government will do little to ease

domestic demand growth this year. As a result we have revised upwardsour real GDP estimate for 2000.

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ISSN 0269-5464

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Turkey 1

EIU Country Report October 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2001-027 Political outlook8 Economic policy outlook

10 Economic forecast

13 The political scene

26 The domestic economy26 Output and demand29 Employment, wages and prices32 Financial indicators

34 Foreign trade and payments

List of tables

10 International assumptions summary11 Gross domestic product by expenditure12 Forecast summary19 The consolidated central government budget24 Average yields on Treasury bills at auction25 Domestic debt26 Outstanding external debt27 Gross domestic product28 Gross national product29 Industrial production, quarterly index30 Workforce and unemployment31 Nominal hourly wages of production workers in manufacturing31 Trends in inflation33 Selected financial indicators34 Exchange rates35 Foreign trade35 Foreign trade by geographical distribution36 Current-account balance

2 Turkey


37 Tourist arrivals from abroad38 Capital account38 Foreign-exchange and gold reserves

List of figures

13 Gross domestic product13 Turkish lira real exchange rates19 The consolidated central government budget27 Gross domestic product32 Inflation37 External balances

Turkey 3


Summary

October 2000

Despite divisions in the ruling coalition, the government of Bulent Ecevitshould hold together in 2001. Its survival thereafter will depend on progresswith the IMF-backed three-year stabilisation programme launched at thebeginning of 2000. Tighter fiscal policy and the new crawling-peg exchange-rate regime will continue to reduce inflation, but it will be above thegovernment’s year-end targets. Nevertheless, the authorities should keep policysufficiently on track to maintain IMF support. Real GDP growth will slow in2001 and 2002, but fixed investment growth should remain strong, helping toachieve annual average GDP growth of over 4%. The budget deficit will declinesharply in 2001-02 as a result of the steep fall in interest rates in 2000 and thegovernment’s continued commitment to a tight fiscal policy. The current-account imbalance will ease slightly but will remain large at about 4% of GDP.

The government and the president clashed in August-September over thecabinet’s use of decree laws to push through legislation during theparliamentary recess. Mesut Yilmaz, the leader of Anap, joined the cabinet asdeputy prime minister with responsibility for supervision of reforms requiredfor EU accession. Human rights will be central to the EU’s demands, but theruling parties have not resolved their differences. Necmettin Erbakan, theformer leader of the banned pro-Islamic Welfare Party, may avoid prison.

The IMF-backed stabilisation programme targets have remained on track. TheCentral Bank stuck to its foreign exchange and monetary policy targets andfiscal performance was positive in the first eight months of the year. The IMFhas insisted on a tight budget for 2001. The government has relaunched theTurk Telekom sale after no bids were received in September. Legislation neededto push ahead with banking sector reform was held up. Turkey continued to tapthe international financial markets to reduce dependence on domestic debt.

Real GDP increased by 5.2% in the first half of 2000, driven by strong domesticdemand growth and activity in the services sector. Year-on-year consumer priceinflation fell to just under 50% in September. Consumer credit rose sharply inthe first eight months of 2000. The stockmarket remained depressed.

Rising imports pushed up the foreign trade deficit to US$11.7bn in the firsthalf of 2000, from US$5.6bn in the same period of 1999. The current-accountdeficit also widened sharply but was covered by large net capital inflows. As aresult foreign reserves remained high at over US$24bn at the end of September.

Editors: Robert O'Daly (editor); Merli Baroudi (consulting editor)Editorial closing date: October 19th 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2000-01

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

4 Turkey


Political structure

Republic of Turkey

Parliamentary republic

Based on European models and constitution of 1982

Unicameral Meclis (parliament) of 550 members directly elected for a five-year term

Universal direct suffrage over age of 18. Only parties gaining more than 10% of thenational vote are eligible for seats in parliament

April 18th 1999; next election due by April 2004

President, elected by an absolute majority of the Meclis for a seven-year term. Currentpresident: Ahmet Necdet Sezer, elected in May 2000. The next election is due in May2007

On June 9th 1999 parliament voted in a coalition government led by Bulent Ecevit,comprising the Democratic Left Party, Nationalist Action Party and Motherland Party

Islamist: Virtue Party (VP or Fazilet; successor to the Welfare Party, Refah); centre-right:Motherland Party (Anap), True Path Party (DYP), Democratic Turkey Party (DTP); centre-left: Democratic Left Party (DSP), Republican People’s Party (CHP); nationalist right:Grand Unity Party (BBP), Nationalist Action Party (MHP); independent pro-Kurdish:People’s Democracy Party (Hadep)

Prime minister Bulent Ecevit (DSP)Deputy prime minister Devlet Bahceli (MHP)Deputy prime minister Mesut Yilmaz (Anap)

Sukru Sina Gurel (DSP) Mustafa Yilmaz (DSP)Hasan Gemici (DSP) Fikret Unlu (DSP)Recep Onal (DSP) Abdulhaluk Cay (MHP)Mehmet Kececiler (Anap) Tunca Toscay (MHP)Yuksel Yalova (Anap) Faruk Bal (MHP)Rustu Kazan Yucelen (Anap) Ramazan Mirzaoglu (MHP)Edip Safter Gaydali (Anap) Suayip Usenmez (MHP)

Agriculture Husnil Yusuf Gokalp (MHP)Culture Istemihan Talay (DSP)Defence Sabahattin Cakmakoglu (MHP)Education Metin Bostancioglu (DSP)Employment & social security Yasar Okuyan (Anap)Energy & natural resources Cumhur Ersumer (Anap)Environment Fevzi Aytekin (DSP)Finance Sumer Oral (Anap)Foreign affairs Ismail Cem (DSP)Health Osman Durmus (MHP)Housing & public works Koray Aydin (MHP)Industry & trade Almet Kenan Tanrikulu (MHP)Interior Saadettin Tantan (Anap)Justice Hikmet Sami Turk (DSP)Tourism Erkan Mumcu (Anap)Transport Enis Oksuz (MHP)

Gazi Ercel

Official name

Form of state

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political parties

The Council of Ministers

Ministers of state

Key ministers

Central Bank governor

Turkey 5


Economic structure

Annual indicators

1996 1997 1998 1999 2000a

GDP at market prices (TL bn) 14,320 28,721 53,523 83,198 126,427

GDP (US$ bn) 175.9 189.1 205.3 198.7 205.8

Real GDP growth (%) 7.3 7.6 3.2 –5.1 6.0

Consumer price inflation (av; %) 80.4 85.7 84.6 65.1 54.2

Population (m) 61.5 62.5 63.5 64.4 65.3

Exports of goods fob (US$ m) 32,446 32,647 31,220 29,326 30,564

Imports of goods fob (US$ m) –43,028 –48,005 –45,328 –39,773 –52,031

Current-account balance (US$ m) –2,437.0 –2,638.0 2,096.0 –1,364.0 –9,916.1

Foreign-exchange reserves excl gold (US$ m) 16,436.0 18,658.0 19,489.0 23,340.0 25,450.0

Total external debt (US$ bn) 79.6b 84.9b 97.0b 102.1b 108.9

Debt-service ratio, paid (%) 21.9 19.5 21.2 30.5a 31.9

Exchange rate (av) TL:US$ 81,405 151,865 260,724 418,783 614,314

October 16th 2000 TL:US$1; TL:€1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total

Agriculture, forestry & fishing 15.0 Private consumption 67.6

Industry 23.2 Government consumption 14.1

Construction 5.6 Gross fixed investment 20.3

Services 56.1 Stockbuilding 1.4

GDP at factor cost 100.0 Exports of goods & services 21.6

Imports of goods & services –25.0

GDP at market prices 100.0

Principal exports 1999c US$ m Principal imports 1999c US$ mClothing 6,201 Electrical/non-electrical machinery, appliances & parts 11,489

Yarn, cloth & other textiles products 2,057 Mineral fuels & oils incl crude oil 5,377

Electrical machinery, appliances & parts 1,647 Road vehicles & parts 3,096

Iron & steel 1,542 Iron & steel 2,056

Fruits & vegetables 1,522 Plastics & products 1,822

Road vehicles & parts 1,474 Organic chemicals 1,626

Main destinations of exports 1999c % of total Main origins of imports 1999c % of totalGermany 20.6 Germany 14.5

US 9.2 Italy 7.8

UK 6.9 France 7.7

Italy 6.3 US 7.6

France 5.9 Russia 5.8

Netherlands 3.5 UK 5.4

EU 53.9 EU 52.6

a EIU estimates. b Revised data from the Treasury. They differ slightly from less recent figures provided by the World Bank. c Excluding “suitcase”trade.

6 Turkey


Quarterly indicators

1998 1999 20003 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

OutputGDP at constant 1987 prices (TL bn) 35,160 28,553 22,860 27,094 33,070 27,611 24,026 28,530 % change, year on year 2.5 –1.0 –9.0 –2.2 –5.9 –3.3 5.1 5.3Industrial production indexa (1995=100) 121.1 115.8 112.5 119.9 109.9 113.1 117.8 122.7 % change, year on year –0.9 –4.4 –9.9 0.9 –9.2 –2.3 4.7 2.3 Manufacturinga 119.9 113.8 110.8 118.3 108.6 110.5 115.5 122.2 Mining 131.8 112.0 89.4 99.4 114.5 101.1 85.9 96.0 Electricity, gas & water 132.2 133.3 134.0 127.3 135.8 143.0 149.7 134.2

Employment, wages & pricesEmployment, manufacturing (‘000) 815.2 779.3 745.6 758.3 752.1 735.5 742.9 775.1 % change, year on year 1.2 –1.4 -4.1 -5.7 –7.7 –5.6 –0.4 2.2Unemployment rate (% of the labour force) n/a 6.7 n/a 7.9 n/a 7.3 n/a n/aHourly earnings, manufacturingb (1995=100) 532 580 505 576 663 713 853 951Consumer prices (1995=100) 641.0 747.3 839.6 941.3 1,056.9 1,240.9 1,417.5 1,521.6 % change, year on year 82.3 72.9 64.4 63.7 64.9 66.1 68.8 61.6Wholesale prices (1995=100) 568 636 701 787 872 1,006 1,168 1,252 % change, year on year 68.3 58.1 48.8 50.1 53.6 58.2 66.6 59.1

Financial indicatorsExchange rate TL:US$ (av) 272,519 293,742 342,132 396,440 438,780 497,779 563,714 610,611 TL:US$ (end-period) 276,875 314,464 368,269 420,350 459,497 541,400 589,478 619,588Interest rates (av; %) Deposit 75.3 82.2 82.3 82.5 79.6 69.3 38.9 40.8 Interbank money market 70.0 78.7 77.5 76.9 69.9 69.8 42.0 40.3M1 (end-period; TL trn) 2,125.1 2,433.0 3,010.4 2,655.7 3,128.3 4,307.1 4,212.8 n/a % change, year on year 87.6 63.1 103.5 48.5 47.2 77.0 39.9 n/aM2 (end-period; TL trn) 19,000 20,473 23,536 27,633 32,710 40,604 43,610 n/a % change, year on year 121.3 89.7 93.6 83.2 72.2 98.3 85.3 n/aStockmarket indexc (end-period; 1986=1) 2,266 2,598 4,544 4,950 6,071 15,209 15,920 14,466 % change, year on year –12.6 –24.7 39.7 20.7 167.9 485.4 250.4 192.2

Sectoral trendsProduction Crude steel (av; ‘000 tonnes) 1,216 1,167 1,062 1,239 1,246 1,224 1,076 1,259 Cement (av; ‘000 tonnes) 3,941 3,087 2,176 3,414 3,308 2,508 1,602 3,564 Cars (av; ‘000) 18.4 17.5 10.1 22.3 18.0 23.6 17.9 28.9

Foreign trade (US$ m)Exports fob 6,326 6,895 6,034 5,994 6,160 7,339 6,431 6,498Imports cif –11,264 –11,019 –7,871 –10,220 –10,365 –11,846 –11,293 –13,731Trade balance –4,938 –4,124 –1,837 –4,226 –4,205 –4,507 –4,862 –7,233

Foreign payments (US$ m)Merchandise trade balance –4,012 –3,082 –831 –3,263 –3,121 –3,232 –3,818 –5,947Services balance 4,576 4,067 1,647 1,646 2,580 1,572 n/a n/aIncome balance –691 –828 –806 –1,060 –771 –900 n/a n/aCurrent-account balance 1,440 1,840 1,276 –1,379 128 –1,389 –2,301 –3,258Reserves excl gold (end-period) 21,583 19,489 21,373 21,621 23,652 23,340 23,111 24,742

a Seasonally adjusted. b Gross earnings per production worker. c ISE National-100.Sources: OECD, Main Economic Indicators; IMF, International Financial Statistics; Standard & Poor’s, Emerging Stock Markets Review.

Turkey 7


Outlook for 2001-02

Political outlook

The present coalition government, consisting of the Democratic Left Party(DSP), the Nationalist Action Party (MHP) and the Motherland Party (Anap),seems likely to remain in office during most of the outlook period of 2001-02.Nevertheless, because of the inherent instability of the Turkish political system,the uncertainty surrounding the Constitutional Court’s imminent decision onthe closure of the pro-Islamist Virtue Party, and unresolved differences in theruling coalition, a political crisis cannot be completely ruled out.

Serious disputes between the MHP and the other two governing parties arelikely to emerge, especially on such issues as the abolition of the death penalty,greater of freedom of expression and the Kurdish question—all areas in whichthe EU is likely to demand reforms. The prime minister, Bulent Ecevit, and theAnap leader, Mesut Yilmaz, may be able to win the support of the oppositionparties on some of these issues, and Devlet Bahceli, the leader of the MHP, willprobably prefer not to bring down the government so as to be able to continueto exercise the powers of patronage which office brings, and perhaps sharesome of the credit if the government’s IMF-backed stabilisation programmeis successful.

If the Constitutional Court decides to close down the Virtue Party and depriveall or most of its sitting MPs of their seats, this would require by-elections in upto 55 of Turkey’s 84 constituencies—virtually equivalent to a general election.In this case, the government will almost certainly prefer to call a full generalelection. However, a more likely outcome is that the Constitutional Court willonly remove a few leading members of the party from their seats—in whichcase the party would almost certainly carry on under a new name and a newleader or acquit it altogether. The confrontation over cabinet decrees betweenthe government and the president, Ahmet Necdet Sezer, which has been themain source of instability in recent months, will probably continue but isunlikely to trigger a government crisis. However, the government may havedifficulty passing some of the decrees as normal legislation.

Another major threat to the government’s survival could come from a suddendeterioration in Mr Ecevit’s health, given that he is 74 years old and reportedlysuffering from the slow advance of Parkinson’s disease.

Turkey’s relationship with the EU is expected to dominate its foreign policyagenda following the decision by the European Council of December 1999 toaccept Turkey as a candidate for EU membership (1st quarter 2000, page 15).The European Council is due to issue an Accession Partnership document forTurkey in November, to which the Turkish government will need to respondwith an implementation programme. This presents the government with thedifficult task of overcoming fierce domestic opposition to effective humanrights improvements, especially from the MHP and the military, both of which

Domestic politics

International relations

8 Turkey


are firmly opposed to anything seen as a concession to Kurdish nationalism or(in the army’s case) to political Islamism.

The role of the military in Turkish politics in general, especially that of themilitary-dominated National Security Council, is also likely to come under thespotlight. The government will need to make positive advances on all theseissues before accession negotiations can begin.

Turkey’s relations with Greece, and its role in the Cyprus problem, will be acrucial area of foreign policy, since the EU is unlikely to open accession untilprogress is made towards settling bilateral Greek-Turkish disputes. Indirect“proximity talks” between the Greek and Turkish Cypriot leaders have beencontinuing under UN auspices but seem unlikely to make serious progress.Plans to build the Baku-Ceyhan pipeline, to link the Caspian oil basin with theMediterranean via Turkey, will continue to occupy the government. If thisproject is brought to fruition, then Turkey will acquire an important role in theCaspian energy game.

Economic policy outlook

Turkey’s ambitious IMF-backed three-year stabilisation programme, launchedin December 1999, relies on three main areas of policy adjustment: a rapidreduction of the fiscal deficit; structural reforms, especially privatisation; andthe introduction of a more rigid exchange-rate regime in the early years ofadjustment, supported by a forward-looking incomes policy. The programmehas made good progress in all three areas and, despite some shortcomings,Turkey should retain the support of the IMF, assuming that the governmentremains stable and the international environment favourable.

An IMF team is expected in Turkey in the second half of October to reviewprogress during the third quarter. Its overall assessment should be positive, butit is also likely to highlight shortcomings in the government’s implementationof the programme. The government’s failure to push through structuralreforms by means of decrees has left a backlog of legislation concerning thebanking sector, the energy market, social security reform and the 2001 budgetto be approved by parliament.

The overall consolidated central government deficit, which is now estimated tobe about 12% of GDP in 2000, is forecast to decline sharply in 2001 and 2002owing to the rapid fall in yields on government securities this year. Thegovernment’s target of about 5.5% of projected GNP for the primary surplus(the budget balance net of interest payments) in each of the three years of thestabilisation programme to 2002 appears attainable. This reflects expectationsof strong tax revenue growth—although one-off taxes and tax increases willhave to be replaced in the 2001 budget that is to be submitted to parliament bythe end of October—as well as a degree of wage restraint in the public sectorand current spending cuts.

Fiscal policy

Policy trends

Turkey 9


The government’s privatisation programme is also central to the achievement ofthe fiscal targets, since revenue raised by the Privatisation Administration (OIB)will be used to retire expensive domestic debt, thereby lowering thegovernment’s interest burden. The government had expected to raise US$7.6bnin 2000 and US$6.1bn in 2001. However, it now expects to be almost US$1.5bnshort of the 2000 target, following its failure to find a buyer for a 20% equitystake in Turk Telekom. The new tender, which has increased the stake for theblock sale from 20% to 29%, with a further 5% to be floated, has sought toovercome foreign investors reservations. The sale is not expected to go aheaduntil 2001. However, the government’s overall revenue for the two years is stilllikely to be achieved.

According to IMF data published earlier this year, past deficits on the broaderconsolidated government sector have been substantially larger thanpreviously thought, presumably because of the earlier lack of transparency inTurkey’s public accounts. In 1999 the deficit was estimated at 23.3% of GNP,compared with 15.9% in 1998. Figures for the broader consolidated govern-ment accounts, which are only available for the first quarter of 2000, indicatethat the government has met its IMF performance target for the broaderpublic-sector primary balance, as well as that for the narrower centralgovernment primary balance. Last year’s social security reforms and thereining in of state bank credits to the agricultural sector should help toreduce the deficit on the extra-budgetary component of the consolidatedgovernment accounts. However, the growing losses of other state enterprises,particularly in the energy sector, may offset the positive progress elsewhere.

The financial markets’ confidence in the stabilisation programme and netrepayment of domestic debt have helped to reduce interest rates ongovernment securities. Domestic debt is being partly replaced by cheaperinternational bond issues, which amounted to US$7bn in the first threequarters of the year. Accordingly, interest payments will be reducedsignificantly but will nevertheless remain considerable. Yields on Turkish-lira-denominated securities are hovering around 40%, and although this is muchlower than the treble-digit rates of a year ago, it still represents a substantialpremium over the anticipated rate of inflation.

The new crawling-peg exchange-rate regime, one of the main pillars of Turkey’sstabilisation programme, is operating smoothly. The actual monthly rates ofnominal depreciation of the lira against the euro/dollar basket were exactly inline with the Central Bank’s targets of 2.1% in the first quarter, 1.7% in thesecond quarter and 1.3% in the third quarter. The Central Bank has announceda gradual slowdown in the nominal rate of depreciation from 1% in the fourthquarter of 2000 to 0.85% in the second quarter of 2001. After this theexchange-rate regime will gradually become more flexible to avoid excessive realappreciation of the lira. The Central Bank has also succeeded in meeting its twomonetary policy performance criteria (net domestic assets and net internationalreserves) under the IMF stabilisation programme.

Monetary policy

10 Turkey


Economic forecast

The international backdrop to the stabilisation programme remains broadlyfavourable, but GDP growth in the EU, Turkey’s largest trade partner, is forecastto slow from an estimated 3.4% in 2000 to 3% in 2001 and 2.6% in 2002. InGermany, Turkey’s largest national export market, economic expansion is alsoexpected to slow. Nevertheless, it will still be quite robust at 2.9% in 2001 and2.6% in 2002, and domestic demand growth will be stronger than in theprevious two years.

However, the rebound in the major OECD economies will be accompanied byrising EU and US short-term interest rates in 2001. This will increase theinterest-rate burden on Turkey’s external variable-rate debt, which accounts foralmost half its medium- and long-term debt stock. Although oil prices areexpected to ease slightly in 2001-02, commodity prices will be higher, puttingpressure on inflation and import expenditure.

International assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growthWorld 3.5 4.9 4.2 4.1OECD 2.9 4.1 3.1 2.7EU 2.3 3.5 3.0 2.6

Exchange rates (av)¥:US$ 113.9 107.1 104.0 102.0US$:€ 1.070.93 0.951.05SDR:US$ 0.731 0.769 0.775 0.738

Financial indicators¥ 2-month private bill rate 0.27 0.23 0.43 0.98US$ 3-month commercial paper rate 5.18 6.40 6.55 5.25

Commodity pricesOil (Brent; US$/b) 17.9 29.1 25.4 19.1Gold (US$/troy oz) 278.8 283.2 275.0 270.0Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 4.2 10.1Industrial raw materials (% change in US$ terms) –4.3 14.9 8.7 2.3

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) rates.

Real GDP growth in Turkey is forecast to slow from an estimated 6% in 2000 toan annual average of just under 5% in 2001-02, reflecting a continuation of thegovernment’s tight fiscal policy to meet fiscal targets set by the IMF, weakerexternal demand, and the removal of the one-off expansionary effect from thesharp fall in interest rates in 2000. Nevertheless, domestic demand will remainquite strong, mainly driven by substantial increases in fixed investmentexpenditure. The foreign balance will continue to reduce total GDP growth,but weaker demand for imports will help to reduce the size of the negativecontribution.

International assumptions

Economic growth

Turkey 11


Gross domestic product by expenditure(TL bn at constant 1987 prices; % change year on year in brackets unless otherwise indicated)

1999a 2000b 2001c 2002c

Private consumption 75,691.0 80,232.5 83,842.9 87,196.6(–3.1) (6.0) (4.5) (4.0)

Public consumption 9,623.0 10,200.4 10,557.4 10,821.3(6.5) (6.0) (3.5) (2.5)

Gross fixed investment 28,370.0 32,767.4 36,699.4 40,369.4(–16.0) (15.5) (12.0) (10.0)

Final domestic demand 113,684.0 123,200.2 131,099.7 138,387.3(–6.0) (8.4) (6.4) (5.6)

Stockbuilding 1,937.0 2,750.0 2,850.0 2,750.0(2.0)d (0.7)d (0.1)d (–0.1)d

Total domestic demand 115,621.0 125,950.2 133,949.7 141,137.3(–4.0) (8.9) (6.4) (5.4)

Exports of goods & services 32,890.0 34,863.4 36,519.4 38,345.4(–7.0) (6.0) (4.8) (5.0)

Imports of goods & services –37,876.0 –43,557.4 –47,477.6 –50,563.6(–3.7) (15.0) (9.0) (6.5)

Foreign balance –4,986.0 –8,694.0 –10,958.2 –12,218.2(–0.9)d (–3.4)d (–1.9)d (–1.0)d

GDP 110,635.0 117,256.2 122,991.6 128,919.1(–5.1) (6.0) (4.9) (4.8)

a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth.

The disinflation process begun in 2000 is expected to continue into 2001 and2002, helped by the impact on prices of the government’s tight fiscal policy andthe new exchange-rate regime. However, the government is unlikely to achieveits consumer price inflation target of 7% by the end of the three-yearprogramme. The factors determining the projected overshoot include theprospect of renegotiating the contracts of 500,000 public-sector workers in2001; an increase in the flexibility of the exchange-rate regime in the secondhalf of next year and 2002; and the need for hefty price increases in the publicsector to rein in losses at a number of state enterprises.

The new exchange-rate policy—in place since January 1st 2000—predeterminesthe monthly pace of nominal lira depreciation in line with the government’swholesale inflation target against a basket consisting of US$1 plus €0.77 untilJune 2001. Thereafter, the Central Bank will only intervene to keep the lirawithin a symmetrical, gradually widening band either side of a central rate,adjusted monthly by a predetermined monthly nominal depreciation rate(0.85% in the second half of 2001).

Assuming the international environment remains favourable, the Central Bankhas ample foreign-currency reserves (over US$24bn at the end of September) todefend the quasi-currency peg, and we expect the lira to continue to depreciatein line with the Central Bank’s targets. However, there is concern that inflationtarget overshooting, combined with a rigid exchange-rate policy, will result inan unsustainable real appreciation of the currency and an untenabledeterioration in the current-account balance, which could derail thestabilisation programme.

Exchange rates

Inflation

12 Turkey


After a sharp rise from 0.7% of GDP in 1999 to an estimated 4.8% in 2000, weexpect the current-account deficit to decline to about 4.5% in 2002. The modestimprovement reflects our expectation of a gradual slowdown in domesticdemand growth and lower oil prices, which will reduce the rate of increase inthe value of imports, and a steady recovery in the tourism sector. Although thecurrent-account deficit will remain quite large, we expect Turkey to receivesufficient inflows of foreign capital, mainly in the form of internationalborrowing and foreign direct investment, to cover it.

The government had suggested that it might introduce measures to curbimports in 2000, and in early September it increased taxation on consumerlending, which has been fuelling strong consumer spending and higher importgrowth. However, even if more effective measures are introduced before theend of the year, they are not expected to start to have an effect on the externalbalance until 2001.

Forecast summary(% unless otherwise indicated)

1999a 2000b 2001c 2002c

Real GDP growth –5.1 6.0 4.9 4.8

Industrial production growth –5.2 4.0 6.4 4.8

Gross agricultural growth –4.6 2.5 2.0 2.0

Unemployment rate (av) 7.3 8.3 9.0 9.5

Consumer price inflation Average 65.1 54.2 25.6 20.6 Year-end 68.8 35.2 21.5 21.0

Short-term interbank interest rate 75.3 35.4 28.6 26.6

Government balance (% of GDP) –11.0 –12.0 –6.7 –5.0

Exports of goods fob (US$ bn) 29.3 30.6 32.2 34.1

Imports of goods fob (US$ bn) 39.8 52.0 55.8 59.0

Current-account balance (US$ bn) –1.4 –9.9 –9.7 –9.7 % of GDP –0.7 –4.8 –4.4 –4.5

External debt (year-end; US$ bn) 102.1d 108.9 121.0 127.7

Exchange rates TL:US$ (av) 418,783 614,314 701,539 863,126 TL:¥100 (av) 367,652 573,763 674,557 846,202 TL:€ (year-end) 543,891 581,416 774,840 1,035,834

a Actual. b EIU estimates. c EIU forecasts. d Revised data from the Treasury. They differ slightly fromless recent figures provided by the World Bank.

External sector

Turkey 13


The political scene

In August-September there was a sharp deterioration in relations between thegovernment, led by Bulent Ecevit, and the president, Ahmet Necdet Sezer, whowas elected by parliament in May. On the surface the confrontation appearedto be procedural, that is, over the legislative instruments used by thegovernment to introduce certain reforms, rather than over the fundamentaldirection of government policy. However, the president’s willingness tochallenge the government has also been seen as part of a broader strugglebetween liberal and authoritarian forces in Turkey, with the president and mostof the public, according to opinion polls, supporting liberal reforms.

The confrontation between the government and Mr Sezer began in August,when the president sent back a government “decree with the force of law”unsigned on August 8th, and again on August 21st, after the decree wassubmitted to him for a second time. The decree, based on enabling legislationpassed by parliament in July but subsequently overruled by the ConstitutionalCourt on October 5th, was intended to weed out the alleged large number ofsupporters of political Islamism or Kurdish separatism from the statebureaucracy and local authorities. It would have made it possible to dismissstate employees merely on the strength of reports by two inspectors, on suchcharges as trying to change the secular character of the republic or taking partin separatist or subversive activities or strikes. The decree was believed to havebeen prepared at the behest of the military. However, it evidently had thesupport of the prime minister and of his coalition partners in the NationalistAction Party (MHP).

Under Article 104 of the constitution the president must sign governmentdecrees before they can be promulgated, although the text does not specificallysay that he is entitled to refuse his signature. In fact, until this year nopresident had refused to do so since the current constitution was introduced in1982. Mr Sezer argued that he was not opposed to the decree’s contents, but

Government and presidentat loggerheads over decrees

14 Turkey


that it should have been presented as a normal bill to parliament, rather thanissued as a decree.

According to Mr Ecevit, the president exceeded his constitutional powers by notsigning the decree. However, the president appeared to have won his point at ameeting on August 23rd of the National Security Council (MGK), which bringstogether the armed forces commanders, the prime minister and other ministers,and is chaired by the president. The council merely declared that action againstpublic servants alleged to have tried to destroy the “democratic and secularstructure of the state” or to “damage the integrity of the country” should betaken “urgently and by whatever means”. However, the strength ofparliamentary opposition to the measure, both within the Motherland Party(Anap) and the two opposition parties, makes the passage of such a bill unlikely.

By the end of August Mr Ecevit seemed to be anxious to play down theconfrontation with the president. However, the crisis erupted again onSeptember 26th, when Mr Sezer refused to sign a second decree regarding thepartial privatisation of three state banks, on the grounds that it provided fortax concessions for those purchasing shares, which can only be introducedthrough normal legislation approved by parliament (see also Economic policy).This provoked Mr Ecevit into a second attack, again arguing that the questionwhether the decree conforms to the constitution should be decided by theConstitutional Court, not by the president.

Following parliament’s decision not to send Mesut Yilmaz to trial by theConstitutional Court on charges of corruption, the leader of Anap wasofficially included in the cabinet as deputy prime minister. When thegovernment was formed in May 1999 he decided to remain outside the cabinetuntil his name had been cleared. Mr Yilmaz has also assumed specialresponsibility for the supervision of reforms required to bring Turkey into linewith the Copenhagen criteria, with which it will have to conform if accessionnegotiations with the EU are to start eventually (1st quarter 2000, page 15).Mr Yilmaz’s inclusion in the cabinet has clearly strengthened his position andthat of his party, the smallest of the three parties in government.

The EU is expected to lay down its terms for the start of accession negotiationswith Turkey in an Accession Partnership Document, due to be issued onNovember 8th, to which Turkey will be expected to respond with animplementation programme. In the meantime, it appears that the most criticalconditions likely to be stipulated by the EU will probably be the fullwithdrawal of the death penalty, the recognition of Kurdish cultural rights, andwidening the freedom of expression, notably by withdrawing or substantiallyreforming Article 312 of the Penal Code; Article 8 of the Law for the Struggleagainst Terrorism; and Articles 13-14, 26-28 and 115 of the constitution. Anend to the regular use of torture of suspects by the police is another importantrequirement on the human rights agenda.

On September 21st the cabinet adopted what was officially referred to as a“reference document” on the steps Turkey would need to take to meet theCopenhagen criteria. This was supposed to be based on the report issued on

Mr Yilmaz joins the cabinetas deputy prime minister

EU to make human rightscentral to accession process

Turkey 15


May 31st by the High Council on Human Rights, which is attached to theprime minister’s office, proposing changes to Articles 13-14, 26-28 and 115 ofthe constitution, as well as contentious articles of the Penal Code and the Lawfor the Struggle against Terrorism”, and the complete abolition of capitalpunishment (July 2000, page 16). However, the document left many issues veryvague—for instance, it is not at all clear what (if any) changes were beingproposed to Penal Code Articles 312 and 159, while references to minorityrights and the “lifting of prohibitions against languages” were evidentlyexcluded as a result of pressure from the MHP leader, Devlet Bahceli. Even thequestion of abolishing the death penalty was apparently left in limbo. Theuncertain status of the document—whether or not it was actually agovernment decision or just a set of ideas—is evidently a reflection of sharpdivisions within the government. However, it apparently left it open forMr Ecevit and Mr Yilmaz to bypass opposition within the MHP by bargainingwith the opposition parties once serious legislative proposals had been made.

Officially, all political parties oppose the use of torture, which is banned underArticle 17 of the Turkish constitution. The only problem is how to ensure thatthe police forces adhere to this principle. Similarly, all but one of parties nowappear to support the abolition of capital punishment, the sole importantexception being the MHP, which insists that it should be retained for thoseconvicted under Article 125 of the Penal Code (which outlaws actions aimed atseparating any part of the territory of the republic and affects the case ofAbdullah Ocalan, the former leader of the PKK, or Kurdistan Workers Party).

Article 312 of the Penal Code, which has been used to convict Islamistpoliticians such as Necmettin Erbakan (see below) as well as allegedly pro-Kurdish dissidents, is also supported in its present form by the MHP and themilitary. However, both the Democratic Left Party (DSP) and Anap favourreform of this contentious article, apparently by proposing that supposedlypro-Islamist or “separatist” statements that constitute a threat to publicsecurity should be counted as a crime. Reform of Article 312 is broadlysupported by both the opposition parties, that is, the pro-Islamist Virtue Party,and Tansu Ciller’s True Path Party (DYP). Hence, the main division on this issueappears to be within the government—with the DSP and Anap on one side andthe MHP on the other—rather than between the government and theopposition as a whole.

Widening the freedom of expression by reforming Articles 13-14 and 26-28 ofthe constitution may be more difficult still, since this will require a two-thirdsmajority in parliament, rather than the simple majority required for anamendment of the Penal Code and other statute laws. However, an alliance ofthe DSP, Anap, DYP and Virtue could in principle achieve this, provided theycan agree on a common formula. The MHP would probably prefer not to bringdown the government on these issues. More contentiously, recognisingKurdish cultural rights, such as the right to broadcast in Kurdish—let aloneallowing Kurdish language lessons in schools—will be difficult to achieve, sincethis is opposed not only by the MHP and the military, but also by largesections of the DSP and other parties.

Ruling parties are dividedon human rights questions

16 Turkey


However, the government’s determination to overcome international criticismof Turkey’s performance on human rights was borne out when Turkey signedtwo UN Conventions on Civil and Political Rights and Economic, Social andCultural Rights on August 15th. The conventions date from 1966, but Turkeyhad hitherto been almost unique among supposedly democratic countries innot signing them—presumably because this might have implied recognition ofthe rights of the Kurds as a “minority” in Turkey. The first convention statesthat “all peoples have the right of self-determination”, although, in theKurdish case, it is doubtful whether this could be interpreted as the right toform an independent state. However, it clearly stipulates that “ethnic, religiousor linguistic minorities” should have “the right to enjoy their own culture ... orto use their own language”. It also underlines general rights to freedom ofexpression and assembly, and the right to found societies, all of which are quiteseverely restricted in Turkey.

While Turkey’s signing of the two conventions was certainly a step forward,critics point out that it would still have to be ratified by parliament to gainofficial force. Moreover, even if ratification were secured, there would be noguarantee that Turkey would apply the conditions stipulated by theconventions: instead, there was the danger that it would simply leave itscommitments on the shelf, as many other signatory states have done. Turkishforeign ministry officials have also pointed out that there are provisions in theconventions for “developing countries” to apply them in stages, suggestingthat the government would probably treat them as a vague long-term goalrather than an immediate or definite commitment.

On August 31st the European Court of Human Rights rejected NecmettinErbakan’s appeal for a stay of execution of his conviction for allegedly pro-Islamist statements (July 2000, page 15). However, on September 13th theAnkara Public Prosecutor’s Office agreed to postpone the beginning of hisprison sentence to January 13th 2001, on payment of a guarantee. In effect,this gives the government three months to alter Article 312 of the Penal Code,under which Mr Erbakan was convicted, so as to prevent his imprisonment—which Mr Ecevit and others publicly declared should be avoided, givenMr Erbakan’s advanced age and position as former prime minister. Althoughthe MHP can be expected to oppose changes to the relevant article, it seemslikely that the prime minister will get the support of the Virtue Party, besidesthat of Anap, to effect the necessary amendment (July 2000, page 17).

In August 1999 parliament passed a law under which those convicted forwriting books or articles or making broadcasts breaking the laws limitingfreedom of speech would be released, with their sentences suspended for threeyears (4th Quarter 1999, page 18). However, this partial amnesty did not coververbal statements made, for instance, at public meetings (as in the case ofMr Erbakan). This omission was challenged in the Constitutional Court which,in a verdict issued on September 19th, annulled it on the grounds that it wascontrary to the principle of equality before the law stipulated in Article 10 ofthe constitution. Apparently, this verdict would allow an amnesty for allprisoners serving sentences of up to 12 years, including those with ordinarycriminal convictions. However, it would not take effect until September 2001,

Turkey signs UN social andeconomic rights charters

Mr Erbakan may escape aprison sentence

Turkey 17


allowing the government one year to enact a new law. Evidently, it would notaffect Mr Erbakan, since his sentence was due to start before the deadlineexpired. Nevertheless, it was clear that the government would have to pass newlegislation regarding the freedom of expression if it wants to avoid a massrelease of prisoners, including ordinary criminals, in September 2001.

Although the Republican People’s Party (CHP) failed to clear the minimumthreshold of 10% of the vote for representation in parliament in the April 1999election, it still has some importance in Turkish politics, since it retains abedrock of popular support and stands to gain votes from dissatisfied centre-left supporters if the DSP loses support at the next election. Among themainstream parties it has been taking the most liberal line on the Kurdishquestion, and on civil rights in general. However, the party has been sufferinginternal turmoil as its leader, Altan Oymen, who took over the chairmanship ofthe party from Deniz Baykal after the last general election, was challenged forthe leadership by Mr Baykal himself and by Hasan Fehmi Gunes, the leader ofthe left-wing faction of the party. At a special party convention held onSeptember 30th-October 1st Mr Baykal was re-elected leader of the party, butonly in the third round of balloting. He obtained 543 of the delegates’ votes,against 355 votes for Mr Oymen and 12 for Mr Gunes. Given that Mr Baykalwon barely more than half of the votes out of a total of 1,039 delegates and hisrecord as leader of the CHP between 1992 and 1999 was far from successful,turmoil within the party can be expected to continue. Hence, it is likely thathis leadership will again be challenged when the party meets for its regularconvention in May 2001.

Economic policy

The government’s three-year stabilisation programme, backed by the US$4bnIMF standby accord signed in December 1999, has remained on track andcontinues to guide economic policy. Monetary and exchange-rate targets werein line with third-quarter 2000 targets, and the improvement in the publicfinances appears to have continued. Legislation intended to introduce furtherstructural reforms is also in the pipeline. An IMF delegation visited Turkey inthe first two weeks of September and was due to return for further talks in thesecond half of October. As a result of these talks, the Turkish government wasexpected to draft a third supplementary letter of intent, paving the way for therelease of a fourth tranche of credit under the US$4bn three-year standbyaccord reached in December 1999. The third tranche of credit, worth aboutUS$295m, was released on July 6th.

Some difficulties have arisen, however. The privatisation revenue target ofUS$7.6bn in 2000 is unlikely to be achieved owing to the government’s failureto find a bidder for a stake in Turk Telekom, the state telecommunicationscompany. Inflation, as expected, is also running ahead of the year-end target.In addition, the government is struggling to manage a strong surge in domesticdemand, driven by lower interest rates and a sharp increase in consumer

IMF-backed stabilisationprogramme is still on track

Deniz Baykal returns asleader of the CHP

18 Turkey


lending, which threatens to derail the disinflationary process under way sincethe beginning of the year.

On September 11th, in response to public statements made by the IMF deskchief, Carlo Cottarelli, about the surge in domestic demand and the need forcountermeasures, including a tightening of the government’s wages policy, theprime minister, Bulent Ecevit, publicly criticised “foreign institutions” fortrying to put themselves in the place of the government and for seeking to“dictate” the government’s wages and incomes policy. Initially, the primeminister’s remarks made the financial markets nervous. However,Mr Cottarelli’s turn of phrase—and perhaps his high public profile—ratherthan the IMF’s recommendations were the real target of Mr Ecevit’s rebuke.Mr Cottarelli has continued to praise Turkey’s performance in internationalforums, and the government appears keen to carry out the IMF’srecommendations.

The Central Bank continues to abide by the IMF-agreed foreign-exchange andmonetary policy. Under this policy, the bank announces daily exchange ratesin accordance with preordained monthly rates of nominal lira depreciationagainst a basket of US$1 plus €0.77. The bank guarantees to supply andpurchase foreign exchange at the posted rates on demand, which prevents theemergence of any alternative market. The rates of depreciation are related tothe inflation targets. The monthly rate of depreciation in the third quarter of2000 was 1.3%.

For the fourth quarter of 2000 and the first and second quarters of 2001 themonthly rates of depreciation are set at 1%, 0.9% and 0.85% respectively. Atthe end of September the governor of the Central Bank, Gazi Ercel, announcedthat the 0.85% monthly rate would be retained for the third and fourthquarters of 2001 as well. From mid-2001 the Central Bank will allow the lira tofluctuate within a gradually widening band above and below the dailyexchange rate set by it.

Under the IMF-agreed policy, the Central Bank also refrains from increasing ordecreasing lira liquidity by any means other than the sale and purchase offoreign exchange. Compliance with this principle is monitored via the netdomestic assets position of the Central Bank, which under the IMF accord mustremain below a ceiling of minus TL1,200trn (US$1.8bn) on average in the lastweek of each quarter. This target has so far been adhered to.

The consolidated central government balance showed a primary balance ofalmost TL7,000trn in the first eight months of 2000. Both total revenue andtax revenue were over 100% higher than in 1999 and amounted to just overtwo-thirds of the target for the year as a whole. Revenue from the emergencyone-off taxes introduced after the 1999 earthquakes, which will have to bereplaced by permanent taxes in 2001, accounted for about 15% of total taxrevenue in January-August.

Non-interest expenditure growth has been relatively subdued at just 50% yearon year. Among the major expenditure items, the increase in personnel costswas 46.8%, in spite of earlier criticism of the government’s modest concessions

The Central Bank sticks toits foreign-exchange policy

Fiscal performance ispositive

Turkey 19


to civil servants when wage increases were agreed at the beginning of the year.Last year’s social security legislation has also contributed to a significant realreduction in subsidies to the social security institutions. This positive trend isexpected to continue in the final part of the year, following the decision toraise the upper limit on premiums paid to the social security institution (SSK)from three times the minimum to four times with effect from August, sevenmonths ahead of an IMF-agreed deadline.

In spite of the large primary surplus, the overall consolidated centralgovernment balance for the first eight months of 2000 showed a deficit ofsome TL10,317trn, reflecting the high cost of domestic debt servicing.Nevertheless, higher than expected nominal GDP growth owing to higherinflation means that total interest payments could well be below the target of16.9% of GNP for the year as a whole.

The consolidated central government budget(TL trn)

1999 2000 Jan-Aug 2001a

% of % of % % ofYear GNP Target GNP 1999 2000 change Year GNP

Total revenue 18,933 24.2 32,585 26.1 10,951 22,155 102.3 43,127 28.1 Tax revenue 14,802 18.9 24,000 19.2 8,580 17,517 104.2 31,777 20.7 Direct taxes 6,716 8.6 9,828 7.9 4,086 7,594 85.9 – – Indirect taxes 8,087 10.3 14,172 11.3 4,493 9,923 120.9 – – Other revenue 4,131 5.3 8,585 6.9 2,372 4,637 95.5 11,350 7.4 of which: income from state property 951 1.2 4,179 3.3 534 754 41.2 – – funds 1,541 2.0 2,200 1.8 928 1,351 45.6 – –

Total expenditure 28,085 35.9 46,713 37.4 17,673 32,471 83.7 48,360 31.5 Interest payments 10,721 13.7 21,133 16.9 7,578 17,296 128.2 16,680 10.9 On domestic borrowing 9,825 12.6 19,803 15.8 7,057 16,366 131.9 – – On foreign borrowing 896 1.1 1,330 1.1 521 930 78.5 – – Non-interest expenditure 17,364 22.2 25,580 20.5 10,095 15,175 50.3 31,680 20.7 of which: personnel 6,912 8.8 9,200 7.4 4,308 6,323 46.8 12,000 7.8 other current expenditure 2,261 2.9 3,840 3.1 823 1,508 83.2 4,770 3.1 investment 1,544 2.0 2,352 1.9 690 1,136 64.6 3,500 2.3 tax rebates 1,160 1.5 966 0.8 770 1,009 31.0 – – social security 2,750 3.5 3,469 2.8 1,901 2,446 28.7 4,335 2.8 funds 986 1.3 1,377 1.1 588 970 65.0 – –

Primary budget balance 1,569 2.0 7,005 5.6 856 6,979 715.3 11,447 7.5

Budget balance –9,152 –11.7 –14,128 –11.3 –6,722 –10,317 53.5 –5,233 –3.4

Memorandum itemGNP 78,242 – 124,967 – – – – 153,405 100.0

a Government projections.Source: Ministry of Finance, General Directorate of Public Accounts.

Data for the broader public-sector primary balance, which is also monitored asa performance criterion in the IMF-backed stabilisation programme, are onlyavailable for the first quarter of 2000. They were also better than expected,with the primary balance, including privatisation receipts, amounting toTL2,827trn above the target of TL2,150trn. In the same period the overall

20 Turkey


balance was TL4,495trn compared with an indicative floor of TL6,000trn. Theconsolidated public-sector balance includes the consolidated central govern-ment balance, four non-budgetary funds (the public participation fund,privatisation fund, defence industry fund and the mass housing fund), eightstate economic enterprises (including the state monopolies in the agriculturalsector and the state energy companies), plus the unemployment insurancefund and social security institutions.

State support for agriculture, an important component of budget imbalances inthe past, has been curtailed this year. Increases in support prices for tobaccoand cereals announced in March and July were modest, and the amounts ofproduce purchased have been limited (July 2000, page 20). Support prices arepaid by the state enterprises which buy up and process significant proportionsof agricultural output.

Meanwhile, there has been strict implementation of the IMF-agreed TL250trnlimit on budgetary support for the unions of agricultural sales co-operativesthat purchase and process most other crops. The unions have been obliged toannounce competitive support prices, which has generally meant increasescompared to last year close to or lower than the 25% year-end target consumerprice inflation rate. For hazelnuts, the support price announced in August wasonly 8% above last year’s. The co-operatives are also looking to reduce theirworkforce to make further savings.

Producers of some crops—cotton, olives, sunflower seeds—are paid a premium(from within the budget) per kilogram sold regardless of the purchaser. Thesepremiums are also being kept low this year at 9 US cents for cotton, forexample, compared with 12 US cents in 1999. Starting in 2001, the supportprice system is to be replaced by a cheaper system of direct income support.However, the government and the World Bank are reportedly at odds over thecost of the necessary farmer registration system.

The large losses incurred by the state enterprises in the energy sector, which area considerable burden on Turkey’s public finances, have prompted thegovernment to introduce measures aimed at increasing revenue from electricitysales and reduce subsidisation of the cost of energy. A 50% surcharge has beenimposed on electricity consumption of over 150 kwh per month byhouseholds, and a new flat standing charge has been introduced. However,these measures will only partly alleviate the losses caused by high generatingcosts, transmission losses and non-payment by users. Power shortages areexpected between October and next April, and the Ministry of Energy isconsidering additional measures to save energy. The suggestion that the state-run iron and steel producer, Isdemir, and the aluminium producer, SeydisehirEti Aluminym, should be temporarily closed drew protests from the tradeunions and the Chamber of Trade and Industry in Iskenderun, where theIsdemir plant is located. The balances of the state enterprises which aresuffering losses or financing problems as a result of the current situation—namely, the electricity generation and distribution companies, TEAS andTEDAS, the Turkish Hard Coal Board (TTK) and the pipeline and gas company,BOTAS—are included in the broader consolidated government sector accounts.

Agricultural subsidies havebeen checked

Steps taken to cut energysector subsidisation

Turkey 21


Meanwhile, the pricing of liquefied petroleum gas (LPG) has also become acontroversial issue because of its consequences for the public finances andinflation. LPG is subsidised through the price stability support fund on thegrounds that it is commonly used for cooking and hot water in poorhouseholds. Moreover, the rate of fuel consumption tax is much lower on LPGthan on other petroleum products. The high level of subsidisation and themore favourable tax regime have contributed to an explosion in the use of LPGas an alternative to petrol and diesel in transport vehicles, which has increasedthe cost of the subsidy and could lead to a shortfall in revenue. Energy ministryofficials say the cost of the subsidy in 2000 could reach US$415m, and lost taxrevenue—which was independently estimated at US$220m in 1999—couldamount to US$762m. In September the cabinet, on the proposal of the energyministry, authorised a cut in the LPG subsidy. However, the government ishesitating for fear of spurring inflation and upsetting commercial drivers andother vested interests. Back in July the rate of value-added tax (VAT) on gasused in motor vehicles was raised from 17% to 40%, and the charge made forcompulsory testing of vehicles converted to use LPG was increased fromTL7.4m to TL156.7m.

The government faces additional revenue losses as a result of reductions in thelevel of the fuel consumption tax in August and September. The reductionswere made in order to keep the prices of domestic petroleum products stable inthe face of high international oil prices. The total reduction in the case ofdiesel is as much as 18% of the original tax level. The fuel consumption taxbrings in about TL300,000tn (US$440m) a month. The government justifiesthe reductions as part of its battle against inflation. However, as in the case ofelectricity, the IMF believes the full cost price of petroleum products should bereflected in prices charged to the final user.

Central to the talks with the IMF is the budget for 2001. The government haspresented the draft 2001 budget containing fiscal targets for next year. Theseappear to be in line with IMF recommendations (see Table: Consolidatedgeneral government budget). However, details of the measures to be adoptedhave yet to be announced. The emergency taxes introduced in the 2000 budgetafter the August 1999 earthquake will have to be replaced by more permanenttax measures. The IMF would also like to see sharper reductions in spending.Moreover, the Fund is concerned that fiscal policy should be as tight aspossible in order to curb stronger than expected domestic demand, particularlythe private consumption expenditure component. This is necessary to keepinflation on its current downward path and prevent the growing current-account deficit from reaching an unsustainable level. Keeping 2001 publicservice pay increases in line with the 12% consumer price inflation target fornext year will be particularly important in the government’s efforts to keepdomestic inflationary pressures under control, since public service paysettlements also act as a guideline for pay rises for other sectors. The civilservice pay settlement will be known by the end of October, when thegovernment announces the outline of the 2001 budget (see Employment,wages and prices).

The IMF is seeking a tightbudget for 2001

Petrol tax is reduced

22 Turkey


In September the government introduced two minor measures aimed atdampening consumer demand. The tax on consumer credit interest was raisedfrom 3% to 8%, and new cars with 1601-2000cc engines were reclassified asluxury items subject to 40% VAT, as opposed to 25% previously. The lattermeasure is more specifically aimed at reducing imports, as only a smallproportion of domestically produced cars have engines over 1600cc. Thismeasure could be considered to run contrary to the spirit of the EU’s customsunion agreement, in place since 1996, because it discriminates against EUproducers.

By the September 15th closing date there were no foreign bids in the tender fora 20% stake in the state fixed-line telecommunications monopoly, TurkTelekom. The tender was only open to consortiums with experienced telecomsoperators. However, foreign telecoms operators reportedly wanted a larger stakeand/or guarantees of management rights. In early October the governmentannounced that an additional 9% stake, that held by the Post and TelegraphsAuthority, would be put on offer for the block sale and a further 5% would besold by public offering. The shareholders are to be represented on the TurkTelekom board in proportion to their stakes, but unanimity would be requiredin taking strategic decisions. However, these concessions may also proveinsufficient to attract bidders, particularly given that there has been a surplusof telecoms privatisations and mobile phone licence offers recently.

The delay means that the government is unlikely to raise the US$7.6bn inprivatisation revenue included in the stabilisation programme. Nonetheless,this may be less serious than initially thought because the bulk of the shortfallwill be offset by higher than projected revenue from the cell phone licence saleto Is Bankasi and Telecom Italia Mobile (TIM), assuming the transfer of fundstakes place according to schedule. In addition, the government has been able totap international markets quite easily at relatively competitive rates.

Among other privatisation deals, the sale of a 51% stake in the petroleumproducts distributor, POAS, was completed in July. The winning consortium ofIs Bankasi and Dogan Holding opted against payment in instalments and paidthe full price of US$1.26bn. Procedures concerning payment for the mobilephone licence by Is Bankasi and TIM are still not complete. The partners haveformed a new company, Is-Tim, and are expected to make a US$500m paymentsoon, with the outstanding US$2bn to follow within three months. Announce-ments were also expected regarding the privatisation of a Petkim petrochemicalplant and the sale of a stake in the national carrier, Turkish Airlines.

The award of rights to operate power plants and regional electricitydistribution networks may also help to offset the shortfall from the delay in theTurk Telekom sale. These deals have a total value of over US$3bn, of whichabout US$2bn could theoretically be cashed by the end of 2000. But a range offinancial and legal complications means that only one private operator hastaken over the running of an existing power plant so far, fetching US$85m.Under the terms of its loan agreement with the World Bank, the government isto abandon any deals which are not completed by the end of 2000, with a viewto commencing a programme of outright privatisation.

The government seeks torelaunch Turk Telekom sale

Turkey 23


On September 26th the president, Ahmet Necdet Sezer, returned unsigned tothe government a “decree having the force of law” establishing a frameworkfor the privatisation of the state banks, Ziraat Bankasi, Halk Bankasi and EmlakBankasi (see The political scene). The government had taken several weeks toagree on the details of the legislation. The president’s main objection was theinclusion of tax exemptions in the sale of the banks’ shares. Tax changes mayonly be made by an act of parliament. The decree, which is now expected to bepresented in the form of a bill for examination by parliament, envisages thecreation of a restructuring authority, the 100% sale of the banks within amaximum of four-and-half-years, a reduction in the banks’ personnel, and theuse of foreign credit (mainly in the form of a World Bank loan) to eliminatelosses built up as a result of services carried out on behalf of the state.

The passage of the framework legislation on state bank privatisation wouldsecure the release of a World Bank financial sector reform loan. The loan will bepaid in two tranches of US$750m each, and will attract Japanese co-financing ofanother US$750m. Turkish officials hope the legislation will be approved intime for the loan to be discussed at a meeting of the World Bank Board onNovember 27th. In late July the president approved a government decreeproviding for the public offer in late October of about 20% of the shares inanother state-controlled bank, Vakifbanksi, with a further 55% to be sold at alater date. However, the public offer may not now go ahead, following theConstitutional Court’s decision to overrule the enabling act under which thegovernment was authorised by parliament to issue decrees with the force of law.

The new Bank Regulatory and Supervisory Agency (BDDK) took office at thebeginning of September. Its tasks include deciding on the fate of the eightprivate-sector banks taken from their owners and currently underadministration. International consultants have recommended grouping thebanks according to size and customer profile in order to facilitate their sale.However, it is still unclear how the rehabilitation of these banks, which isexpected to precede their sale, is to be financed. The regulator will also beresponsible for applying increasingly stringent capital adequacy rules, reserverequirements and foreign-exchange limits, and for deciding how to deal withany banks that are unable to comply. Under the letter of intent to the IMF,accounting standards, market risk-related capital adequacy requirements andrisk management systems have to be put in place by the end of 2000. However,this deadline may not be achievable.

After the rapid approval of social security reforms before the signing of the IMFagreement in 1999, further legislation in this area has proved more difficult toapprove. Five social security bills were submitted to parliament but not debatedbefore the assembly’s three-month recess at the beginning of July.Subsequently the bills were withdrawn, amended and approved by thepresident as decree laws at the beginning of October. However, these are nowin danger of being annulled following the Constitutional Court’s decision tooverturn the enabling legislation on the basis of which the government hasissued decrees not requiring parliamentary approval. The proposals included:creating twin umbrella bodies for the three social security institutions andsocial assistance schemes; regulating and providing fiscal incentives for

Bank privatisation is stillon hold

Confusion reigns oversocial security legislation

24 Turkey


voluntary private pension schemes; separating the social security and healthservices of the state social security institution (SSK ) with a view to the eventualprivatisation of health services; and increasing the contributions paid bysubscribers to Bag-Kur (the social security institution for the self-employed).

Draft laws to restructure the electricity and gas/petroleum sectors are expectedto be placed before parliament. In each case, the state institutions thatdominate the sectors will be broken up, the role of the private sector increasedand independent regulators created. The electricity transmission system willbecome a independent entity and regional/city distributors will buy powerunder contracts with generators (in principle, all generating capacity is to beprivatised). There will be a two-year transition period. A similar system isplanned for gas, although the state enterprise, BOTAS, will retain a monopolyon imports. The gas market will fall under a new petroleum regulator, whichwill also loosely oversee the domestic oil market, including explorationlicensing. In line with its commitments to the IMF and the World Bank, thegovernment is aiming to have these laws on the statute book by the end of2000. The complexity of the bills and the crowded legislative agenda maymake this difficult to achieve.

As a result of the fiscal tightening and easier access to international markets,this year the Treasury has been able to reduce its domestic debt issues andborrow less than the debt falling due. In the first eight months debt raisedamounted to just over 70% of total redemptions, which has helped to keep theTreasury’s borrowing costs low, and yields on liquid government bonds andbills fell to little over 30% for much of the third quarter, although in Augustborrowing exceeded redemptions by about TL500trn.

In September, however, secondary market yields gradually rose to just below40%, as the market took a less optimistic view of the political and economicoutlook. Reasons for the rise in yields include uncertainty surrounding theoutcome of the Constitutional Court verdict on the closure of the Virtue Party,divisions within the ruling coalition, differences between the government andthe president, the prime minister’s rebuke to the visiting IMF delegation and theIMF’s concern over inflation and the external balances, the continued weaknessof the euro, high oil prices, and the failure of the Turk Telekom tender.

The pace of increase in the domestic debt stock slowed in the middle of theyear, as the government replaced expensive, predominantly short-termdomestic debt with relatively cheaper, longer-term international issues.

Average yields on Treasury bills at auction(%)

1999 2000Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

6-month-billa 103.4 – – 37.0 39.8 36.0 32.2 37.5 39.8 32.6 33.4 33.6

3-month-bill 95.7 93.3 – 38.7 41.6 – 37.7 39.9 – 32.0 31.4 –

a Or nearest maturity, excluding 3-month.Source: Under-secretariat of the Treasury.

Energy sector reforms arein the pipeline

Short-term domestic debtyields edge up in September

Turkey 25


Domestic debt(TL trn)

1998 1999 2000Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr Jan-Aug

Total domestic debt (end-period) 11,613 14,244 16,980 20,028 22,920 22,920 26,679 30,392 31,393 Government bonds 5,772 9,691 12,599 15,993 19,683 19,683 24,881 28,853 29,135 Treasury bills 5,841 4,553 4,380 4,035 3,237 3,237 1,798 1,539 2,258

Borrowing 14,254 6,520 7,056 6,887 6,425 26,886 10,636 9,145 24,470 Government bonds 4,708 4,973 4,889 4,938 5,228 20,028 9,287 7,760 19,631 Treasury bills 9,546 1,547 2,167 1,948 1,197 6,859 1,349 1,385 4,838

Debt service 14,472 6,085 7,086 6,363 5,944 25,478 13,068 11,487 32,287 Principal 8,845 3,889 4,320 3,837 3,533 15,579 6,877 5,433 15,997 Interest 5,627 2,197 2,765 2,526 2,411 9,899 6,191 6,055 16,290

Source: Under-secretariat of the Treasury.

The government continued to borrow regularly from international capitalmarkets in the third quarter of 2000, raising a total of almost US$2m in euro-and US dollar-denominated bonds, mainly by increasing existing bond issues.Borrowing costs declined slightly in the same period. On September 5th theJune 8th dollar-denominated issue of US$750m in ten-year bonds wasincreased by US$750m, with the new bonds priced at 529 basis points overcomparable US government securities, compared with a spread of 575 points inJune. The new issues brought total foreign-currency-denominated governmentborrowing in 2000 up to US$7bn. Principal and interest payments onconsolidated budget foreign debt are projected at US$7.2bn this year, of whichUS$5.7bn had been paid by the end of August. The US credit rating agency,Moody’s, is to decide whether or not to raise Turkey’s B1 sovereign rating aftera mission to Turkey in October.

In the second quarter of 2000 public-sector medium- and long-term debt roseby about US$2.1bn to US$45.8bn mainly as a result of international bondissuance. This figure excludes Central Bank liabilities, which consists mainly ofdeposits of expatriate Turks. Private medium- and long-term debt declinedslightly in the same period.

According to the latest external debt data published by the Central Bank, totalpublic- and private-sector foreign debt, including short-term debt, reachedUS$106bn at the end of June. This represents an increase of US$3.9bn in thefirst half of the year. However, Treasury calculations show that during thisperiod the strength of the dollar against other currencies, in which Turkey hasexternal liabilities, particularly the euro and euro-related currencies, helped tohold down the increase in the dollar value of Turkey’s foreign debt. About 55%of Turkey’s debt is denominated in US dollars and over 30% in euros oreuro-related currencies.

The Treasury continues toissue international bonds

26 Turkey


Outstanding external debt(US$ m; end-period)

1996 1997 1998 1999 2000Year Year Year Year 1 Qtr 2 Qtr

Short-term debt 17,345 17,994 21,217 23,472 24,721 24,904Medium- & long-term debt 62,281 66,893 75,756 78,638 78,936 81.125

Total outstanding debt 79,626 84,887 96,973 102,110 103,657 106,029

By lender:Short-term debt Commercial banks 4,940 5,969 6,511 8,262 8,378 9,409 Private creditors 12,405 12,025 14,706 15,210 16,343 15,495Medium- & long-term debt Official creditors 17,821 16,368 16,882 16,133 15,859 16,115 Bilateral lenders 8,909 8,281 8,903 8,398 8,325 8,200 Multilateral organisations 8,912 8,087 7,979 7,735 7,534 7,915 Private creditors 44,460 50,524 58,874 62,505 63, 077 65,010 Private lenders 31,379 36,693 44,739 45,652 44,772 44,777 Bond issues 13,081 13,831 14,135 16,853 18,305 20,233

By borrower:Short-term debt Central Bank of Turkey 984 889 905 686 680 683 Deposit money banks 8,419 8,503 11,159 13.172 14,427 13,998 Other sectors 7,942 8,602 9,153 9,614 9,614 10,223Medium- & long-term debt Public sector 40,200 39,420 40,339 42,537 43,728 45,849 General governmenta 36,299 35,338 36,399 38,345 39,271 41,025 Other governmentb 1,085 939 686 857 1,172 1,175 State-owned enterprises 2,816 3,143 3,255 3,336 3,284 3,650 Central Bank of Turkey 11,389 10,868 12,073 10,312 9,950 10,350 Private sector 10,693 16,605 23,344 25,788 25,258 24,926 Financial institutions 3,343 5,530 7,137 6,877 6,148 6,061 Non-financial institutions 7,350 11,075 16,206 18,911 19,110 18,865

a Central and local government, universities and extra-budgetary funds. b Export-Import Bank,Vakiflar Bankasi and Turkish Development Bank.Source: Under-secretariat of the Treasury.

The domestic economy

Output and demand

After contracting for five successive quarters in the wake of the 1998 Russianrouble crisis and last years’ earthquakes, the Turkish economy reboundedstrongly in the first half of 2000. Real GDP rose by 5.3% year on year in thesecond quarter, following a 5.1% increase in the first three months of the year.GNP showed more moderate growth owing to the negative contribution of netfactor income from abroad. The year-on-year rate of increase in privateconsumption, which accounts for over 70% of domestic demand, acceleratedto 7% in the second quarter, from 4.6% in the first quarter, led by particularlystrong demand for durable goods, expenditure on which was up by 29.9% yearon year, following a rise of 21.8% recorded in the first quarter. The strong

GDP growth rebounds insecond quarter of 2000

Turkey 27


demand for consumer durables, which was also clearly reflected in production,sales and import figures for motor vehicles, white goods and consumerelectronics, has been boosted by the dramatic fall in interest rates thataccompanied the new IMF package at the turn of the year. In 1999 expensiveconsumer credit and the lure of financial savings had led consumers to put offpurchases of durable items.

Growth in gross fixed capital expenditure also accelerated in the secondquarter of 2000, with private-sector gross fixed capital expenditure, whichaccounts for about three-quarters of total fixed investment spending, up by18.3% from 11.9% in the first quarter. Public-sector fixed investmentexpenditure was also up sharply, after an increase in the first quarter. In boththe private and public sectors growth was led by expenditure on machineryand equipment, rather than construction. The rate of increase in imports ofgoods and services, buoyed by strong domestic demand, outstripped that ofexports, reducing overall GDP growth by almost 4.5%.

Gross domestic product(% real change, year on year; 1987 prices)

1998 1999 20002 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr Jan-Jun

Private consumption –0.6 1.3 –5.8 0.6 –6.8 –0.9 –2.9 –1.9 –3.1 4.6 7.0 5.8

Public consumption 14.9 –2.0 10.5 7.8 10.4 2.1 9.1 5.7 6.5 0.3 12.3 6.9

Gross fixed investment –1.5 –7.5 –11.4 –3.9 –19.5 –16.2 –14.3 –14.6 –16.0 10.6 19.8 15.8 Public sector –0.4 0.8 27.7 13.9 –1.5 21.0 –7.8 –13.7 –4.1 3.0 24.4 17.8 Machinery & equipment –1.2 –9.9 51.8 19.1 6.0 105.4 5.6 –13.1 11.2 37.6 43.5 42.0 Building construction –3.3 37.3 23.0 25.0 –6.5 3.4 –9.1 2.7 –1.6 4.9 6.7 6.1 Other construction 1.3 –7.0 15.7 6.3 –3.3 –7.5 –15.1 –22.1 –15.0 –19.0 15.2 3.3 Private sector –1.7 –9.6 –26.4 –8.3 –22.0 –24.1 –16.2 –15.3 –19.6 11.9 18.3 15.3 Machinery & equipment –1.2 –16.3 –36.7 –12.3 –29.2 –33.2 –21.7 –18.5 –26.4 22.9 38.2 30.9 Buildings –2.5 –1.1 –3.1 –1.8 –9.4 –8.9 –10.2 –10.5 –9.8 –3.1 –6.0 –4.7

Exports of goods & services 17.4 4.6 5.4 12.0 –8.1 –10.2 –10.6 1.2 –7.0 7.4 16.1 11.9

Imports of goods & services 10.4 –3.9 –10.3 2.3 –16.6 0.9 –2.1 5.2 –3.7 25.0 14.5 19.1

GDP by expenditurea 3.5 2.5 –1.0 3.2 –9.0 –2.2 –5.9 –3.3 –5.1 5.1 5.3 5.2

a Including change in stocks and excluding statistical discrepancy.Source: State Institute of Statistics.

28 Turkey


A breakdown of GNP by sectors shows that in the first quarter of 2000 theservices sectors were the main engines of growth. In particular, retail andwholesale trade was up by 9.5% year on year. At the same time, growth inindustry picked up to 4% (3.8% for manufacturing) after only 2.8% (2.5%) inthe first quarter. Year-on-year growth in agriculture also improved in thesecond quarter, and construction sector growth turned positive at 1.3%.

Gross national product(% real change, year on year; 1987 prices)

1998 1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

GNPa 9.5 4.5 2.6 0.6 3.9 –8.7 –3.2 –7.4 –6.1 –6.4 4.2 4.4 Agriculture 5.2 3.9 6.8 18.0 8.4 –5.0 –4.7 –3.2 –8.3 –4.6 0.4 2.3 Industry 9.9 2.9 1.9 –5.4 2.0 –9.8 0.8 –8.3 –2.6 –5.0 2.8 4.0 Construction 5.2 –1.0 –1.4 1.7 0.7 –10.5 –11.5 –12.9 –15.2 –12.7 –2.5 1.3 Trade 10.5 2.9 0.1 –5.2 1.4 –13.2 –4.1 –9.3 –0.7 –6.8 10.0 9.5 Transport & communications 13.7 4.3 4.3 –0.7 4.9 –7.5 1.1 –2.4 –7.4 –4.0 5.7 3.4

a Includes net factor income from abroad.Source: State Institute of Statistics.

According to the quarterly industrial production index, industrial output roseby 3.7% in the second quarter of 2000, up from a revised 3.3% in the firstquarter. Private-sector output was up by 10.1% year on year, while public-sectoroutput contracted by 12.1%. This divergence was in part because of thecomparison with the same period last year, when private-sector outputdropped more steeply than public-sector output.

In the manufacturing sector the year-on-year increase in second-quarter outputwas 3.9%, but this figure disguises major differences in the performances of thedifferent subsectors. As mentioned above, lower interest rates boosted domesticdemand for consumer durables which, along with stronger external demand,contributed to increases in output of over 50% for motor vehicles and 35% forradios, televisions and communications equipment. Output of textiles andclothing, which were badly affected by increased competition from Asianproducts, was up by 12.3% and 9.2% respectively. In contrast, output ofpetroleum products remained depressed, declining by 22.5%. This reflects inpart the damage caused by the August 1999 earthquake at the Yarimca refineryof the state enterprise TUPRAS, which only got back to full capacity in lateSeptember, but also the use of more imported LPG in transport vehicles andperhaps competition from sanctions-breaking imports from Iraq.

More up-to-date information on the performance of industry is provided bythe less comprehensive monthly industrial production index. This indexshowed an improvement of 3.5% year on year in July, bringing the seven-month average year-on-year increase up to 3.4%. While the July figures pointto the persistence of most of the trends revealed by the quarterly industrialproduction index in the first half of the year, they also show noticeablystronger year-on-year growth in food processing (21.7%) and constructionmaterials (other non-metal minerals: 9.5%; main metal industry: 7.5%).

Services are still the mainengine of growth

Automotive and householdgoods buoy output

Turkey 29


Industrial production, quarterly index(% change, year on year; 1997=100)

1998 1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Total 8.2 2.8 0.9 –5.5 1.3 –8.5 0.7 –6.3 –0.9 –3.8 3.3 3.7 of which: manufacturing 7.5 1.7 –0.2 –7.1 0.1 –9.8 0.5 –6.7 –1.2 –4.2 2.7 3.9 mining 18.9 18.6 6.1 4.9 11.2 –8.3 –7.5 –13.1 –9.7 –9.9 –4.1 –3.5 utilities 10.7 5.7 9.6 4.7 7.6 1.8 8.1 2.7 7.3 4.9 11.8 5.2

Source: State Institute of Statistics.

The strong recovery in investment activity indicated in the national accountsis confirmed by higher imports of investment goods (see also Foreign trade andpayments). However, the increase in the issue of new investment incentivecertificates was modest, as fixed investment growth has been mainly inmachinery equipment. The value of proposed investments to be made withdomestic capital for which certificates were issued was only up by 15% inTurkish lira terms in the first eight months of the year on the same period ayear earlier, at TL4,230trn.

However, there have been signs that foreign direct investment (FDI) is pickingup. Actual inflows of FDI in the first half of the year amounted to US$835m—more than for the whole of 1999. The amount of FDI capital licensed in thesame period reached US$1.2bn. About half of this was related to private-sectorenergy investments. Construction work has recently begun at two of the fivemajor “build-operate” power plants which are expected to end the electricityshortage when they come on stream in 2002-3. Work on the others is likely tostart by the end of 2000. The total cost of these investments, to be financed bya mixture of local and foreign equity investment and project finance, is overUS$4bn.

Large-scale new investment is also imminent in the telecommunications sector.The two new global systems for mobile communications (GSM) operators—Is-Tim and Turk Telekom—aim to be in business around the turn of the yearand are expected to spend at least US$2bn each on infrastructure.

Employment, wages and prices

According to long-awaited figures released in August, the total number ofpeople in employment fell by just 0.7% between October 1998 and October1999, in spite of the recession and earthquakes. However, the number ofpeople in full employment fell by about 1.15m, or 5.7%, which was offset byan increase in the number of underemployed—who are also included in totalemployment—of about 1m (73.3%). The employment figures for recent yearshave been revised, with 12-14-year-olds excluded from the workforce. Fromnow on, employment figures are to be released on a quarterly basis calculatedfrom the average results of monthly surveys covering a larger sample than theprevious twice-yearly surveys.

Foreign investment appearsto have picked up

The employment survey isup-dated

30 Turkey


Figures for the first quarter of 2000 have already been released, indicating anunemployment rate of 9.1% and an underemployment rate of 8.3%. Theapparent declines in the workforce and in the number of employed peoplereflect the introduction of a narrower definition of the workforce as well asseasonal factors.

Workforce and unemployment

1997 1998 1999 2000Apr Oct Apr Oct Apr Oct 1 Qtra

Workforce (‘000) 21,853 21,796 21,869 22,929 23,449 22,925 20,726

Workforce participation rate (% of population aged 15 or over) 52.6 51.8 51.4 53.2 53.8 52.1 46.7

Total number in employmentb (‘000) 20,476 20.247 20,351 21,393 21,590 21,236 19,006

Agriculture 8,808 7,789 8,145 8,777 9,148 8,595 6,256 Industry 3,361 3,888 3,661 3,614 3,495 3,664 3,617 Construction 1,236 1,336 1,225 1,355 1,242 1,346 991 Services 7,072 7,232 7,319 7,645 7,706 7,630 8,143

Unemployment rate (% of workforce) 6.3 7.1 6.9 6.7 7.9 7.4 8.3

Underemployment rate (% of workforce) 5.5 6.7 6.4 5.9 7.5 10.2 9.1

a Break in series. b including underemployed.Source: State Institute of Statistics.

The year-on-year rate of increase in the hourly wages of production workers inthe manufacturing industry continued to slow in the second quarter of 2000,to just over 60%. In the private sector, the average hourly wage declined in realterms, taking into consideration that consumer price inflation averaged about60% in the same quarter. However, public-sector workers continued to enjoyreal rises in income under the two-year deal negotiated in 1999.

The government is expected to be less generous when the new pay round getsunder way at the beginning of 2001. About half a million workers will beaffected. Pay negotiations are currently being held for about 200,000 unionisedworkers in the private sector, mainly in textiles and the “metal” industry(including those working in the automotive and consumer durables sectors).Unions are seeking initial rises of 35-50% plus six-monthly pay incrementslinked to or in excess of inflation. Employers want rises that do not exceed thegovernment/IMF inflation targets. In August the government banned a strikeamong Istanbul and Izmir city council workers on grounds of public health,meaning that these disputes will go to arbitration.

The increase in the pay of public servants—who unlike public-sector workersdo not enjoy collective bargaining rights—will be decided along with thebudget. A decision on the minimum wage for 2001 must also be taken by theend of the year. The minimum wage—currently TL118m (US$175m) gross orTL87m (US$130m) net—is theoretically determined by a commissionconsisting of government, labour and employers’ representatives, butgovernment policy is likely to be the deciding influence.

Manufacturing wagesdecline ahead of pay talks

Turkey 31


Nominal hourly wages of production workers in manufacturing(% change, year on year)

1998 1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Public sector 142.7 83.9 82.6 80.9 70.1 88.5 119.2 103.5 109.7 81.6

Private sector 88.9 93.5 79.5 74.3 87.9 73.9 79.5 74.2 59.5 56.1

Total 97.8 89.4 79.7 75.3 84.6 77.9 88.9 81.1 67.9 60.1


Inflation has continued to slow on an annual basis, despite high internationaloil prices and strong domestic demand. In September the wholesale price indexrose by 43.9% compared with the same month in 1999, down from just over65% at the beginning of the year. The annual rate of consumer price inflationslowed from almost 70% at the beginning of the year to 49%, the lowest levelsince the end of the 1980s. The decline is the result of the disinflationarypolicies adopted under the IMF-backed stabilisation programme at thebeginning of the year, especially the new exchange-rate regime. However, thegovernment’s ambitious year-end targets of 20% for wholesale price inflationand 25% for consumer price inflation are out of reach: in the first nine monthsof 2000 the cumulative month-on-month rise was 23.7% for wholesale pricesand 26.9% for consumer prices.

Nevertheless, the monthly increases of 2.3% and 3.1% in wholesale andconsumer prices in September were lower than expected. September is usually amonth of high inflation as winter approaches, summer clothing sales end,agricultural produce becomes increasingly scarce, and new prices are set forgoods and services related to education.

The debate continues as to whether the private sector has failed to play its partin defeating inflation. However, many other factors also help explain why therate of inflation has not come down faster. These include the difficulty ofbreaking down inflationary expectations; the weakness of competition in anumber of sectors owing to oligopolies or interventions by professionalassociations; the fact that most service sectors are not open to foreigncompetition and hence cannot be tamed by exchange-rate policies; and highinternational commodity prices. However, one factor helping to reduce upwardpressure on prices has been the government’s decision to reduce petrol taxes toavoid passing on crude oil price rises to the domestic market.

Trends in inflation(% change, year on year; % change on previous month in brackets)

1999 2000Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Consumer prices 64.7 64.6 68.8 68.9 69.7 67.9 63.8 62.7 58.6 56.2 53.2 49.0(6.3) (4.2) (5.9) (4.9) (3.7) (2.9) (2.3) (2.2) (0.7) (2.2) (2.2) (3.1)

Wholesale prices 52.2 56.3 62.9 66.4 67.5 66.1 61.5 59.2 56.8 52.3 48.9 43.9(4.7) (4.1) (6.8) (5.8) (4.1) (3.1) (2.4) (1.7) (0.3) (1.0) (0.9) (2.3)


The inflation rate is justunder 50% in September

32 Turkey


Financial indicators

Most major banks reduced their deposit rates by an average of 5-6 percentagepoints in late July and early August, only to raise them again by another4-5 percentage points in mid- to late September. The reductions were in linewith the declining trend that began with the dramatic interest-rate falls of late1999 and early 2000 and then continued in parallel with falls in inflation.September’s rises in rates were in line with the upturn in money and bondmarket interest rates. They reflected a decline in optimism about the politicaland economic outlook (see Economic policy). Most of the larger banks, stateand private, are now offering 32-33% interest on three-month deposits and 30-32% interest on one-year deposits. The interest earned is subject to 16.5%withholding taxes. For much of this year, growth in TL deposits has trailedgrowth in the main alternative savings instruments offered by the banks:foreign-currency deposits and short-term customer repurchase agreements(repos). This trend appeared to go into reverse in June and July but re-emergedin August and early September.

Some banks matched September’s rises in deposit rates with rises in consumercredit and credit card rates. The fall in these interest rates at the beginning of2000 had ushered in a period of rapid consumer credit growth—154% in thefirst eight months of the year compared with the end of 1999. The overallvolume of credit has also been rising in real terms since the second quarter, andthe volume of bad loans has declined slightly as a percentage of total credit.

Share prices have followed a generally declining trend in recent months afterthe high peaks of January and early May. Amid a lack of positive news,occasional rallies have been short-lived. In August the Istanbul Stock Exchangegeneral index appeared to stabilise at around the 13,000-point mark, but fromSeptember 7th onwards it tumbled, reaching a low of 10,378 on September19th. The slide was attributable to much the same factors that pushed upinterest rates in the same period: fears about political stability, inflation andexternal balances, and concern about privatisation after the failure of the TurkTelekom tender, but also new equity issues, which have drained liquidity from

Share prices fall again inthe third quarter

Interest rates fall but tickup in September

Consumer credit risessharply

Turkey 33


the market. The index recovered to 11,350 at the end of the third quarter, theequivalent of a fall of 25% since the start of the year and of 42% since theJanuary 18th peak of 19,577 points. Nevertheless, the index was still 87%higher than a year ago, before the rally triggered by the IMF. In US dollar terms,this 12-month rise amounts to 29%, despite a 40% fall in the index since thebeginning of the year. Trading volumes have declined along with share prices.In June-September the daily trading volume averaged about US$500mcompared with an average of just over US$1bn for the first five months of theyear and US$356m in 1999.

Selected financial indicators(TL trn unless otherwise stated; end-period; % change since previous quarter/month in brackets)

1998 1999 20004 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr July Aug

Money supplyM1 (currency + sight deposit) 2,284 3,184 2,937 3,468 4,931 5,204 6,142 6,167 6,236

(39.4) (–7.8) (18.1) (42.2) (5.5) (18.0) (0.4) (1.1)M2 (M1 + savings deposit) 10,857 13,255 14,922 18,344 22,596 22,491 24,681 26,119 25,874

(22.1) (12.6) (22.9) (23.2) (–0.5) (9.7) (5.8) (–0.9)M2Y (M2 + foreign currency deposits) 19,426 23,044 26,357 32,214 40,119 43,011 47,446 49,685 50,162

(18.6) (14.4) (22.2) (24.5) (7.2) (10.3) (4.7) (1.0)

Deposits and reposTL bank deposits 10,393 12,304 14,623 17,479 21,500 21,508 23,564 24,757 24,542

(18.4) (18.8) (19.5) (23.0) (0.0) (9.6) (5.1) (–0.9)Foreign currency bank deposits 9,055 10,441 12,007 14,588 18,394 21,414 23,725 24,647 25,394

(15.3) (15.0) (21.5) (26.1) (16.4) (10.8) (3.9) (3.0)Customer repos (banks & brokers) 2,255 3,131 3,614 4,460 4,080 7,321 7,480 6,914 7,356

(38.8) (15.4) (23.4) (–8.5) (79.4) (2.2) (–7.6) (6.4)

CreditsBanking system credit 12,399 14,016 15,631 17,010 19,343 21,179 24,370 25,335 26,435

(13.0) (11.5) (8.8) (13.7) (9.5) (15.1) (4.0) (4.3)Domestic loans by deposit money banksa 10,389 11,599 12,817 14,018 15,692 17,653 20,529 21,418 22,444

(11.6) (10.5) (9.4) (11.9) (12.5) (16.3) (4.3) (4.8)Consumer credits & credit cards n/a n/a n/a n/a 2,143 n/a 4,650 5,034 5,448

– – – – – – (8.3) (8.2)Past due loans (PDLs) 417 1,338 1,571 1,632 1,886 2,251 2,528 2,580 2,631

(220.9) (17.4) (3.9) (15.6) (19.4) (12.3) (2.1) (2.0)PDLs as % of banking system credit volume 3.36 9.55 10.05 9.59 9.75 10.63 10.37 10.18 9.95

a Excluding loans to the financial sector.Source: Central Bank of Turkey.

The third quarter of the year saw another ten initial public offerings after 21 inthe first half of the year. However, the flow of public offerings has slowed sinceJuly owing to investors’ loss of appetite. The most important public offeringwas the US$1.7bn sale of just over 10% of the shares in the leading mobiletelephone operator, Turkcell, on the New York and Istanbul stock exchanges inearly July. The shares were offered at TL44,000, but at the end of Septemberthey were trading at just under TL30,000.

The lira continues to appreciate in real terms against its dollar/euro basketunder the exchange-rate policy introduced in January (See Economic policy).Although monthly inflation figures fell in the summer months, they remained

Turkcell share price fallssharply after offering

The lira continues toappreciate in real terms

34 Turkey


above the nominal depreciation rate. The gains of the US dollar against theeuro resulted in the lira appreciating by about 1% against the euro in the thirdquarter of 2000, whereas it lost over 7% against the dollar.

Exchange rates(TL per currency unit unless otherwise indicated; end-period; Central Bank buying rates)

1997 1998 1999 2000Dec Dec Mar Jun Sep Dec Mar Jun Jul Aug Sep

US$ 204,750 312,720 365,779 418,189 459,780 540,098 588,060 618,098 635,514 653,448 665,885

DM 114,240 187,340 203,833 221,643 248,199 277,169 287,290 302,502 300,206 297,685 298,619

€a – – 398,663 433,495 485,436 542,096 561,891 591,643 587,151 582,222 584,047

Real exchange rateb 80.8 79.3 77.5 75.8 75.6 76.8 80.8 n/a n/a n/a n/a

a Ecu pre-1999. b Trade-weighted.Source: Central Bank of Turkey.

Foreign trade and payments

According to provisional figures, Turkey’s foreign trade balance showed adeficit of US$11.7bn in the first half of 2000, compared with a deficit ofUS$5.6bn in the same period of 1999. The surge was primarily the result of a36% increase in the value of imports compared to the first half of 1999, whenimports were low in response to weak domestic demand and low internationaloil prices in the first quarter. In 2000 lower interest rates and stronger domesticdemand have encouraged Turkish industry to step up its imports ofintermediary goods such as plastics, chemicals and metals, and to a lesserextent of machinery and other capital goods. There has also been an increasein imports of consumer goods. In addition, high international oil prices haveadded significantly to the import bill.

A comparison between the first and second quarters of 2000 shows that thevalue of imports rose sharply in the second quarter. Imports were valued atUS$11bn in the first quarter and US$14bn in the second. Mainly as a result ofthis, the trade deficit rose from US$4.7bn in the first quarter to US$7bn in thesecond quarter.

In the first half of 2000 exports amounted to US$13.4bn, an increase of 4.5%compared with the first half of 1999, in spite of the new exchange-rate regime,which has led to a real appreciation of the lira. However, monthly exportfigures have been erratic. Compared to 1999, the value of exports ofagricultural produce and foodstuffs has been declining, while that of exports ofautomotive and electrical equipment, such as televisions, still appears to begrowing. Exports of clothing and other finished textile products—accountingfor a quarter of all exports—also rose, albeit moderately. Iron and steel exportswere up by 22.8% compared with the January-June period of 1999, benefitingfrom stronger world demand and higher prices. Although Turkey is a netimporter of iron and steel, they account for just 6% of export revenue.

Rising imports drive up theforeign trade deficit

Exports show a modestincrease in value

Turkey 35

EIU Country Risk Service October 2000 © The Economist Intelligence Unit Limited 2000

Foreign trade(US$ m unless otherwise indicated; customs basis; excl “suitcase” trade)

Year Jan-Jun 1998 % change 1999 % change 1998 1999 2000 % change

Exports fob 26,974 2.7 26,587 –1.4 13,332 12,781 13,353 4.5 of which: capital goods 1,324 4.8 1,796 35.6 680 803 988 23.0 intermediate goods 11,150 1.1 10,841 –2.8 5,819 5,501 5,754 4.6 consumption goods 14,484 3.9 13,892 –4.1 6,825 6,461 6,588 2.0

Imports cif 45,921 –5.5 40,687 –11.4 23,320 18,405 25,024 36.0 of which: capital goods 10,624 –3.9 8,729 –17.8 5,212 3,814 4,936 29.4 intermediate goods 29,562 –7.2 26,568 –10.1 15,358 12,140 16,761 38.1 consumption goods 5,364 0.5 5,062 –5.6 2,625 2,260 3,223 42.6

Trade balance –18,947 –15.0 –14,099 –25.6 –9,988 –5,624 –11,671 107.5


In January-June the EU accounted for just over 53% of Turkey’s total exports,more or less stable compared with a year earlier, despite a substantial increasein the value of exports to the EU. Germany remained Turkey’s single largestexport destination. However, in the first six months of 2000 the value ofexports to Germany declined compared with the same period in 1999,reducing that country’s share of total Turkish exports to 18.6% compared withjust over 20% in the same period a year earlier. The buoyant US economy andthe strong dollar made the US Turkey’s fastest growing major export market,accounting for about 11% of total exports, compared with 9% a year ago.

Foreign trade by geographical distribution(customs basis; excl “suitcase” trade)

1998 1999 Jan-Jun 1999 Jan-Jun2000 % of % of % % of % of %

US$m total US$m total change US$m total US$m total change

Exports to:EU 13,498 50.0 14,333 53.9 6.2 6,803 53.2 7,106 53.2 4.5 Germany 5,460 20.2 5,470 20.6 0.2 2,571 20.1 2,483 18.6 –3.4 UK 1,740 6.4 1,830 6.9 5.2 838 6.6 960 7.2 14.6 Italy 1,557 5.8 1,685 6.3 8.2 821 6.4 944 7.1 15.0 France 1,305 4.8 1,570 5.9 20.3 771 6.0 831 6.2 7.8Non-EU 13,476 50.0 12,255 46.1 –9.1 5,978 46.8 6,247 46.8 4.5 US 2,233 8.3 2,437 9.2 9.1 1,178 9.2 1,489 11.2 26.4 Russia 1,348 5.0 587 2.2 –56.5 257 2.0 289 2.2 12.5

Imports from:EU 24,075 52.4 21,419 52.6 –11.0 9,802 53.3 12,332 49.3 25.8 Germany 7,316 15.9 5,881 14.5 –19.6 2,621 14.2 3,246 13.0 23.8 Italy 4,222 9.2 3,192 7.8 –24.4 1,475 8.0 1,899 7.6 28.7 France 3,034 6.6 3,128 7.7 3.1 1,365 7.4 1,705 6.8 24.9 UK 2,683 5.8 2,190 5.4 –18.4 1,000 5.4 1,258 5.0 25.8Non-EU 21,847 47.6 19,273 47.4 –11.8 8,603 46.7 12,692 50.7 47.5 US 4,054 8.8 3,081 7.6 –24.0 1,399 7.6 1,962 7.8 40.2 Russia 2,155 4.7 2,372 5.8 10.1 966 5.2 1,694 6.8 75.4


Exports to Germany declinein value in January-June

36 Turkey


As the value of imports, particularly of oil and gas, soared, the EU’s share of totalTurkish imports fell below 50% in January-June 2000. The main beneficiaries ofTurkey’s import boom have been Russia, whose gas supplies lifted the value ofits exports to Turkey by 75.4% year on year in the first half of 2000), the US(40.2%) and the Middle East countries (69.5%). The rise in imports from theMiddle East stemmed primarily from higher oil prices. Exports to the region, bycontrast, fell by 5.7% year on year in the first half of 2000, leaving Turkey with adeficit in its trade with the region. Middle East countries accounted for 5.4% oftotal imports between January and June 2000, and for 7.7% of exports.

The growing deficit on the merchandise trade balance was the main factorunderlying the sharp deterioration in the current-account balance in the firsthalf of 2000. The current-account deficit widened from US$2.3bn in the firstquarter of 2000 to US$3.3bn in the second quarter, compared with a surplus ofUS$1.3bn in the first quarter of 1999 and a deficit of US$1.4bn in the second.

Current-account balance(US$ m; % change year on year in brackets)

1998 1999 20003 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Exports fob 7,679 7,776 31,220 7,054 6,881 7,177 8,214 29,326 7,495 7,609(–5.6) (–16.3) (–4.4) (–12.0) (–11.2) (–6.5) (5.6) (–6.1) (6.3) (10.6)

of which: “suitcase” trade 879 628 3,689 444 439 619 753 2,255 637 650

(–40.2) (–65.6) (–36.9) (–60.4) (–58.7) (–29.6) (19.9) (–38.9) (43.5) (48.1)

Imports fob –11,691 –10,858 –45,440 –7,885 –10,144 –10,298 –11,446 –39,773 –11,334 –13,561(–7.7) (–19.0) (–5.3) (–29.1) (–13.8) (–11.9) (5.4) (–12.5) (43.7) (33.7)

Merchandise trade balance –4,012 –3,082 –14,220 –831 –3,263 –3,121 –3,232 –10,447 –3,839 –5,952(–11.4) (–25.1) (–7.4) (–73.2) (–18.8) (–22.2) (4.9) (–26.5) (362.0) (82.4)

Services, income & other goods: credit 7,958 7,147 25,802 4,324 4,842 5,292 4,290 18,748 3,968 5,222

(8.2) (37.1) (21.3) (–1.6) (–23.2) (–33.5) (–40.0) (–27.3) (–8.2) (7.8) of which: travel 2,939 1,423 7,177 606 1,185 2,177 1,234 5,203 735 1,831

(–4.5) (8.7) (2.5) (–25.0) (–41.0) (–25.9) (–13.3) (–27.5) (21.3) (54.5) interest income 701 720 2,481 581 617 558 594 2,350 722 498

(44.5) (32.1) (30.6) (24.9) (3.7) (–20.4) (–17.5) (–5.3) (24.3) (–19.3)

Services, income & other goods: debits –4,073 –3,908 –15,325 –3,483 –4,256 –3,483 –3,618 –14,840 –3,650 –3,879

(18.0) (4.5) (14.2) (–0.3) (10.5) (–14.5) (–7.4) (–3.2) (4.8) (–8.9) of which: interest income –1,182 –1,476 –4,823 –1,208 –1,514 –1,266 –1,461 –5,450 –1,358 –1,532

(4.6) (3.1) (5.1) (18.5) (32.1) (7.1) (–1.0) (13.0) (12.4) (1.2)

Current transfers balance 1,567 1,683 5,727 1,266 1,299 1,440 1,171 5,175 1,199 1,343(–0.3) (26.1) (17.7) (11.5) (–3.2) (–8.1) (–30.4) (–9.6) (–5.3) (3.4)

of which: workers’ remittances 1,474 1,592 5,356 1,169 1,192 1,201 967 4,529 1,073 1,159

Invisibles balance 5,452 4,921 16,203 2,107 1,885 3,249 1,843 9,083 1,517 2,686(–0.4) (75.2) (27.4) (3.4) (–50.3) (–40.4) (–62.5) (–43.9) (–28.0) (42.5)

Current-account balance (incl “suitcase” trade) 1,440 1,840 1,984 1,276 –1,379 128 –1,389 –1,364 –2,322 –3,266

(51.9) (–240.9) (–175.2) (–219.4) (507.5) (–91.1) (–175.5) (–168.8) (–282.0) (136.8)

Source: Central Bank of Turkey.

The trade deficit widensthe current-account gap

Turkey 37

EIU Country Risk Service October 2000 © The Economist Intelligence Unit Limited 2000

Earnings from so-called suitcase trade with the countries of the former SovietUnion, which are not included in the customs-based foreign trade dataanalysed above, amounted to US$650m in the second quarter of 2000, upslightly from the first quarter, but almost 50% higher compared with thecorresponding period in 1999. After falling sharply over 1998 and most of 1999owing to the emerging-markets crisis, which hit import demand in Russia andeast European countries, and tighter border controls in Russia, revenue fromsuitcase trade has started to pick up, helping to offset some of the impact ofhigher oil prices and stronger domestic demand on the value of imports andthe foreign trade balance.

Tourist arrivals from abroad(% of total in brackets)

Year Jan-Aug 1998 1999 % change 1999 2000 % change

OECD countries (Europe) 5,174,998 3,607,905 –30.3 2,488,481 3,712,100 49.2 (54.9) (48.2) (49.2) (54.2)

OECD countries (non-Europe) 666,788 564,287 –15.4 371,527 463,617 24.8 (7.1) (7.5) (7.4) (6.8)

Other European countries 1,166,169 1,174,187 0.7 746,790 838,054 12.2 (12.4) (15.7) (14.8) (12.2)

Commonwealth of Independent States 1,299,714 1,052,579 –19.0 716,976 928,286 29.5 (13.8) (14.1) (14.2) (13.5)

Asia 926,041 904,102 –2.4 605,851 756,109 24.8 (9.8) (12.1) (12.0) (11.0)

Total incl others 9,431,280 7,485,308 –20.6 5,053,965 6,855,238 35.6

Source: State Institute of Statistics

The deterioration in the current-account balance in the second quarter of 2000also came in spite of a modest improvement in the invisibles balance. Inparticular, tourism revenue was up by 54.5% year-on-year at US$1.8bn. Figuresfor tourist arrivals point to a continuing recovery in the tourism sector in thehigh-season months of July and August. The number of visitors in these twomonths was 2.95m—a 46.4% increase year on year. The number of visitors fromwestern Europe was 1.76m, up by 61.3% year on year. The government expectsthat measures aimed at dampening domestic demand, a continuation of the

38 Turkey


good tourism performance and an increase in workers’ remittances will help tocheck the rise in the current account-deficit in the second half of the year.

As in the first quarter of the year, the capital account produced a sufficientsurplus in the second quarter of the year to offset the deficit on the currentaccount. Net capital inflows of US$4.4bn—up from US$3.5bn in the firstquarter—once again stemmed mainly from government bond issues and fromprivate-sector borrowing. In spite of a marked improvement in inward foreigndirect investment (FDI), net FDI amounted to only US$170m in January-Juneowing to substantial Turkish direct investment abroad.

Capital account(US$ m)

1998 1999 20003 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Direct investment (net) 155 198 573 92 182 –192 57 138 –20 190

Portfolio investment (net) –7,021 –1,110 –6,711 1,182 619 –72 1,700 3,429 2,091 1,608

Other long-term capital (net) 1,053 325 3,985 –368 –594 461 845 345 248 1,995

Other short-term capital (net) –5,121 3,891 1,398 213 8 399 139 759 1,185 624

Capital-account balance (excl reserves) –10,933 3,304 –755 1,119 215 596 2,741 4,671 3,504 4,417

Current-account balance 1,440 1,840 1,984 1,276 –1,379 128 –1,389 –1,364 –2,322 –3,266

Net errors & omissions 3,577 –6,951 –782 548 2,028 891 –1,568 1,899 –627 248

Overall balance –5,916 –1,807 447 2,943 864 1,615 –216 5,206 555 1,399

Change in reserves (– indicates increase) 5,916 1,807 –447 –2,943 –864 –1,615 216 –5,206 –555 –1,399

Reserve position in Fund 0 0 0 –112 0 0 0 –112 0 0

IMF –70 –81 –231 –79 –78 –78 755 520 –38 254

Change in official reserves (– indicates increase) 5,986 1,888 –216 –2,752 –786 –1,537 –539 –5,614 –517 –1,653

Source: Central Bank of Turkey.

With net inflows on the capital account more than covering Turkey’s current-account deficit, the Central Bank’s foreign exchange reserves rose byUS$1.65bn in the second quarter of this year. At the end of June Central Bankforeign reserves were put at over US$24.5bn (excluding gold). More recent datafrom the Central Bank suggests that reserves remained consistently aboveUS$24bn in the following three months. On September 22nd Central Bankforeign-exchange reserves stood at US$24.3bn.

Foreign-exchange and gold reserves(US$ m; end-period)

1997 1998 1999 2000Dec Dec Mar Jun Sepa Deca Mara Juna Jula Auga Sep 22

Central Bank gold 1,124 1,125 1,012 1,012 1,012 1,011 1,011 1,011 1,010 1,010 1,010

Central Bank forex 18,419 19,718 21,438 22,216 23,583 23,177 22,926 24,547 24,675 24,411 24,294

Commercial banks’ forex 7,625 10,911 11,233 10,110 11,524 12,342 14,140 13,239 14,713 14,234 n/a

Total gross reserves 27,168 31,754 33,683 33,338 36,119 36,530 38,076 38,797 40,398 39,655 n/a

a Provisional.Source: Central Bank of Turkey.

Net capital inflows are upin the second quarter

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